PM Daily Market Commentary - 3/27/2014

Gold closed down -14.10 to 1291.30 on very heavy volume; silver was off -0.03 to 19.70 on moderate volume. Gold sold off starting in Asia, tried to rally in New York, failed, and closed at the day low. Silver performed much better than gold, trading sideways within a range all day long. Silver seemed to be supported by copper, which rose +0.03 to 2.99 - copper looks to be printing an ascending triangle, a bullish chart formation, and appears to be setting up for a break above 3.00.

Along with copper, the commodity index was up as well, +0.79%. The commodity chart still looks quite bullish; if it can make new highs, it will be bullish for PM.

Silver might be a buy here if copper breaks out. Perhaps if China can attend to its credit issues without having a meltdown, copper will get its bounce. If copper cooperates, I'd say silver is looking more attractive that gold for the first time in quite a while. The gold/silver ratio dropped -0.60 which is bullish; perhaps yesterday's high of 66 was the peak for this ratio during this cycle.

Gold for its part blew through both it's 50 and 200 day MAs as well as 1300 support. Gold has dropped seven of the last nine days for a total loss of about $100, and the high volume on the down-days remains bearish. I'm looking for a rebound in gold, but those COMEX gold buyers have to show up before that will happen. All we can do is wait and watch what the market does.

The dollar traded higher today, closing up +0.16 [+0.20%] to 80.20, moving closer to its 50 MA, but not yet through it.

GDX was up today, +1.40% on moderately heavy volume. GDXJ climbed +3.51% on heavy volume. Although the volume on the mining shares was just okay, the fact that the mining shares rose on a day when gold dropped was definitely a positive sign. In addition, intraday activity was also bullish–miners were down right up until the last hour of trading, when buyers showed up and bid the mining shares up into the close. It's been said that the pros really only look at two time periods of the day: the first hour and the last hour of trading, so how miners end the day turns out to give us a clue as to what the professionals are thinking. My guess: either they see good deals here, or they are ringing the cash register closing their short positions after some big gains.

Still, the comparatively low volume still bothers me; we will have to see what tomorrow brings. If GDX can close tomorrow above today's high then we might have the start of the rebound in mining shares. The fact that miners are oversold lend some credence to the possible rebound thesis and in addition, the divergence of miners rising when gold falls is also quite bullish.

Here's a reminder that mining shares can have country risk. One example of that is Kinross Gold – KGC. A few weeks back, traders figured out that Kinross has 27% of its production located in Russia, so over the past two weeks KGC's stock price has been crushed. It is now trading below it's June 2013 lows, and the volume today as it broke to that new low was immense. Presumably the fear is that Russia may nationalize Kinross's gold mines in response to western sanctions.

KGC hasn't been at 4.00 since - well before my 10 year chart, i.e. 2004.

In light of the inflation v. deflation discussion, I was looking at some historical records of the gold price in order to consider how the gold price has fared during various episodes of economic turmoil.

For the time being, I have to let this question go in order to do some work, so this is really just a list of charts, with one question for now.

One thing I notice in many of the charts is the drop in the gold price around the French Revolution and Napoleonic Wars. Why was this? I thought that, generally, the price of gold rose in times of turmoil and I also was under the impression that the French Revolutionaries engaged in a big episode of fiat money creation.

The methodology is key in how "the real price of gold" is determined. If its against a basket of other commodities, that's one thing. If its against a basket of currencies, that's another. And - how it does vs. one currency might differ from how it does vs another currency.

I spent a lot of time trying to sort through "the real price of gold" awhile back. Its a thorny issue. I was mainly trying to figure out if gold was overpriced or underpriced today. But what you are asking is, why does gold do badly during inflationary wartime?

When gold is a monetary metal - pegged to a currency - it behaves very differently than when it is allowed to float freely. A while back I came up with my own basket using USGS historical pricing data - it started out as metals, but then morphed. Basket is comprised of the following items:

Note that gold isn't in there. Weighting of the basket was based on total dollar amounts produced of each item in 1950. Basket weighting examples: Copper 18%, Silver 2%, Cement 29%, Zinc 10%, Iron 20%, Lead 8%.

You can see in the chart below that the inflation in the prices of the basket during WW1 was immense, the deflation during the crash was pretty impressive too - up until the reflation in 1933 - and the US learned its lesson during WW2 and instituted rationing and once removed, inflation popped again in 1946.

During a gold standard (gold & currency are exactly held in sync) if a basket rises, that means gold's relative value drops, and vice versa. This is an artifact of the gold standard, and will likely not represent what will happen when we go off a gold standard.

So, bottom line: gold is basically "held back" by its role as a monetary metal during wartime, and it is "supported" by that same role during a deflationary episode.

My conclusion: most likely, gold will track the rest of the basket in our current environment.